State of the Art of Behavioural Accounting - Literature review Example

of the Art of Behavioural Accounting Research Table of Contents Introduction 3 1.Overview of the Research Topic 3 2.Research Objectives and Questions 4 1.3.Research Methodology 5 2. Literature Review 6 2.1.Behavioral Accounting 6 2.2.Behavioral Financial Accounting 9 2.3.Behavioural Managerial Accounting 13 3. Conclusion 16 4. References 19 1. Introduction 1.1. Overview of the Research Topic In recent days, accounting and auditing have been playing a crucial role in supporting organisations towards preparing their financial reports in a transparent as well as comprehensible manner. While rapid internationalisation within the business sectors have increased challenges for auditors in this paradigm, maintaining transparency has emerged to be quite crucial to avoid possible discrepancies in the reporting standards and the gap persistent therewith. Similarly, regulations associated with accounting and auditing emerged as much rigid in the present day scenario imposing strong impacts on the organisational decision making, especially when concerning its finances. Several academic writers and professional institutes have paid utmost attention towards the state of the art of behavioural accounting research wherein the prime intention has always remained focussed towards identifying the research assumptions of the same, which usually imposes considerable impacts on the decision-making procedure of accounting. Contextually, behavioural accounting assumptions help in preventing cognitive limitations in case of accounting and auditing, as it primarily emphasises understanding reasons to biases in the procedure and hence, offers better scope for enhancing transparency therewith. On the other hand, behavioural accounting assumptions also assist business organisations to maximize their expected utilities. Additionally, behavioural accounting theories also help an organisation to attain profit maximization in a more effective manner (Gillenkirch & Arnold, n.d.). According to the viewpoints of Gillenkirch & Arnold (n.d.), the behavioural accounting theory is utilised in preparing internal financial reports. Larger organisations are also involved in using the approach of behavioural accounting with the aim of preparing and disseminating financial information to the potential investors. In alignment with the above context, it can be inferred that behavioural accounting concepts help the global organisations to conduct their respective financial as well as management accounting procedures more accurately. It is therefore worth mentioning that with the assistance of behavioural accounting concepts, modern organisations are able to effectively implement the principles and guidelines of financial (external) auditing functions. This, in turn, supports them to utilise their respective tax accounting mechanisms more accurately (Gillenkirch & Arnold, n.d.). 1.2. Research Objectives and Questions The prime objective of this study is to identify the key assumptions of behavioural accounting, which is usually practiced by global organisations with the intention of developing the regulation of accounting for the management operations. In this regard, utmost focus has been laid on identifying the impact of behavioural accounting research, which usually helps organisations when conducting financial, management and cost accounting processes. Based on these objectives, the following research question has been framed. Does the state of the art of behavioural accounting along with its components result in better financial accounting practises? 1.3. Research Methodology In this particular study, with the intention of identifying the key assumptions of state of the art of behavioural accounting concept, it is highly essential to incorporate qualitative research approach. Moreover, the utilisation of such approach is deemed justifiable, as the study intends to identify the impact of behavioural accounting in business operations or business related decision-making procedure. Qualitative research method specifically relies on reviewing varied literatures, which is acknowledged as one of the most suitable approaches towards conducting business related evidence-based research studies. In correspondence, for collecting and analysing research data, a secondary research approach was also applied, which specifically relied on accessing varied peer reviewed journals as well as academic articles. Simultaneously, recently published governmental reports, magazines and newspapers are also considered as secondary research materials to obtain adequate understanding regarding the state of the art of behavioural accounting theories. Additionally, ethical aspects have been taken into consideration for ensuring the reliability and validity of the research study. 2. Literature Review 2.1. Behavioral Accounting The conception of behavioural tax accounting signifies the regulations of internal as well as external corporate tax accounting researches. It usually helps organisations to analyse and investigate financial tax related information, which in turn, assists them to make proper tax related judgments and decisions. Contextually, certain factors eventually contribute in developing the perceptions of behavioural tax accounting. These factors can be measured in the form of incessant changes in regulatory policies and wider transformations observed in the business market conditions with increased level of globalisation. Based on the ideas presented by Gillenkirch & Arnold (n.d.), in the mid 20th century, global organisations have applied traditional behavioural tax assumptions with the aim of fulfilling the needs of capital market functions. At the same time, organisations have applied such assumptions for making sensible decisions concerning the business operations for reaping benefits in a wider scale. These benefits may entail ensuring transparency as well as reliability within the overall process and maintaining ethical conducts for protecting any sort of mutual conflict or issue. It is in this context that according to the report of American Accounting Association (2006), the objective of behavioural tax research is to ensure development in the tax environment. Observably, behavioural tax research usually helps an organisation to review the (stock) prices of valuable assets. Behavioural tax accounting also helps an organisation to review dividend based tax capitalisation (American Accounting Association, 2006; Gillenkirch & Arnold, n.d.). Cleary (2009) thus argued that tax research based accounting assumptions are classified into several categories such as tax planning, tax policy and tax compliance. It is worth mentioning that tax planning and tax policy usually helps an organisation to respond to diverse tax law changes more apparently. More importantly, reviewing advocacy of bias tax accounting system is also regarded as one of the prime facets of such assumptions. Notably, behavioural research knowledge is regarded as a decisive facet, based on which, it can be possible for the organisations to identify the roles and responsibilities of tax accountants. At the same time, tax behavioural accounting research can help the organisations to understand the importance of tax return. Hence, effective assistance of tax behavioural research knowledge makes it possible to develop all-inclusive tax planning more apparently, which usually helps taxpayers as well as organisations to accomplish greater success during the business operations (Cleary, 2009). In relation to the above context, Feldstein (1983) affirmed that tax related rules and policies are most essential aspects of an organisation, which can impose direct impacts on the behavioural patterns of the employees of an organisation at large. It can therefore be argued in this similar concern that tax related policies and changes can impose quantifiable impacts on economic indicators as a whole. Simultaneously, it is to be affirmed that tax related policies and changes are likely to impose huge impacts on tax revenue trends of an organisation. In this regard, the report of American Accounting Association (2006) revealed that with the intention of ensuring the state of the art of behavioural accounting research, organisations can understand the requirements of tax law with greater efficiency. Simultaneously, it can be claimed that the above stated approach helps an organisation to make appropriate judgments regarding the tax related laws and the influences of the same. Similarly, by emphasising the behavioural tax assumptions, larger organisations have endeavoured moral and social influences on taxpayers’ behaviours (American Accounting Association, 2006; Feldstein, 1983). In this regard, Feldstein (1983) argued that behavioural tax accounting assumptions generally provide a theoretical replication, through which it can be possible to identify and understand the tax related rules and guidelines. With the help of this theoretical replication, it is also possible to reveal the effects of tax rules in an organisation’s life-cycle model. Simultaneously, it also helps organisations in case of preparing a structured tax and interest rates. In addition, the approach also helps in case of preparing intertemporal budget with the creation of an expected tax budget for future. This might aid in acquiring the benefit of preparing the tax reports with maintaining greater level of transparency and materiality (Feldstein, 1983). In this regard, based on the viewpoint of Feldstein (1983), it can be claimed that the behavioural tax accounting principles have helped organisations to identify several rules and guidelines and estimate the different parameters of tax returns. At the same time, behavioural tax accounting framework tends to provide active support to the organisations in maintaining sustainability by reaping tax benefits. Thus, it can be recommended that organisations should consider the state of income tax rules for the analysis of tax related behaviours. Additionally, the significance of behavioural tax accounting framework lays in ensuring greater reliability and sustainability of tax accounting processes (Feldstein, 1983). 2.2. Behavioral Financial Accounting The perception of Behavioural Financial Accounting (BFA) denotes the regulations or the principles of external corporate accounting researches that aid in analysing and investigating financial accounting judgments along with decisions. In this regard, Gillenkirch & Arnold (n.d.) claimed that through the help of BFA guidelines, it is possible for the organisations to take appropriate financial decisions, resulting in preserving wider sustainability in the accounting procedure. Moreover, it can be argued that BFA guidelines also help organisations to process capital market operations, which in turn, attracts investors to invest substantially (Gillenkirch & Arnold, n.d.). Likewise, Byrne & Utkus (2013) regarded the notion of BFA as a tool for making successful decisions related to investment plans. Facts mentioned by Byrne & Utkus (2013) precisely took consideration of the possible benefits that investors are ought to obtain from the design of their short and long-term investment plans in alignment with BFA (Byrne & Utkus 2013). In an interesting manner, Bhatt & Chauhan (2014) projected behavioural finance as a sophisticated tool, which integrates the concepts of national economics and behavioural aspects of the individuals who project high level of involvement in performing investment functions. As a matter of fact, Bhatt & Chauhan (2014) directly pointed out to the significance of behavioural finance in the context of ensuring the wellbeing of the financial markets. Facts mentioned by Bhatt & Chauhan (2014) also highlighted about how behavioural finance has been regarded as an appropriate element in mitigating the possible loopholes that existed within the domain of traditional finance. Likewise, Kannadhasan (n.d.) illustrated much regarding the reliance of decision makers upon the sophisticated models of risk management that project high effectiveness towards pointing out the obligatory risks, which individuals might face while making huge investments. From a general perspective, one can also understand regarding how behavioural financial accounting can support the auditors in making appropriate strategies related to incentive management and control (Bhatt & Chauhan 2014; Kannadhasan n.d.). From a contradictory perspective, Jahanzeb et al. (2012) projected behavioural finance as a supplemental element of standard finance within modern day accounting structure. As per the viewpoints of Jahanzeb et al. (2012), behavioural financial accounting subsequently helps in projecting the credential integration undertaken by the managers and the individuals who project their interests in making considerable investments. Such concepts also support the development of appropriate decisions within the areas of financial accounting and capital markets. In this context, Sewell (2010) elaborated the concept of behavioural finance from a broader perspective. Facts mentioned by Sewell (2010) precisely elaborated about the relationship prevailing between investors’ behaviours and the possible market complicacies that emerge during the business operations. From a technical perspective, Sewell (2010) remained much focused on the utilisation of suitable analytical tools that sound effective in elaborating the volatile factors persisted within the financial markets. Considering these aspects, it is worth mentioning that these tools might also turn out to be effective enough in imparting appropriate predictive decisions to the investors regarding any form of stock volatility (Jahanzeb et al. 2012; Sewell 2010). In alignment with the facts mentioned by Jahanzeb et al. (2012), Shiler (2003) has also projected similar kinds of thoughts regarding how behavioural finance along with the sociological and psychological aspects can be utilised for shaping appropriate marketing theories. In simple words, Shiler (2003) deciphered about how certain market elements such as volatility within stock price and economic instability lay considerable amount of impact upon the decision-making procedure of the investors. By considering the above stated facts, Shiler (2003) attempted towards encapsulating the financial aspects with the economic ones. Facts mentioned by Levi et al. (2012), from an indirect perspective, also illustrate the impact of potential risks upon the decision-making capabilities of the investors. Understanding the gravity of the situation, Levi et al. (2012) suggested regarding how a control over the behavioural aspects of the investors can help in minimising such potential risks (Jahanzeb et al., 2012; Levi et al., 2012; Shiler, 2003). Specific focus has also been laid upon determining the risks associated with venture partnership and business acquisition. The facts projected by Levi et al. (2012) also find high level of alignment with the thoughts mentioned by Fama (1997), who specifically insisted upon the concepts of long-term investment and behavioural financing. Unlike others, Fama (1997) took consideration of the factors including market competition and changing economic scenario as the prime factors that eventually affect the decision-making procedure of the potential investors. Herschberg (2012), on the other hand, conducted an in-depth analysis and thus, quoted upon two specific elements of behavioural accounting that has the potential of influencing the psychology and decision-making procedure of the investors as well as the accounting managers. Specific level of focus has also been provided upon the ‘limit to arbitrage’ element, based upon which a general assumption can be structured regarding the existence of potential investment scope. Herschberg (2012), in relation to the above context, also projected about the necessity of integrating the ‘limit to arbitrage’ constituent with other aspects of behavioural accounting for making precise predictions regarding the future state of the business markets (Levi et al., 2012; Herschberg, 2012; Fama, 1997). Curtis (2004), in a precise manner, has illustrated about how the concept of portfolio management finds alignment with the behavioural financial accounting for ensuring higher level of sustainability in the long term. Besides, Curtis (2004) also segregated the differences persisting between the traditional financial accounting system and the behavioural financial accounting. By acquiring a brief idea about such differences, it can be ascertained that the approach of behavioural financial accounting can bring in considerable amount of improvisation within its varied functions. Several theoretical aspects projected by Curtis (2004) also portrayed the loopholes existing within the ‘Modern Portfolio Theory’. Precise limitation of behavioural financial accounting also forms specific parts of the facts mentioned by Curtis (2004). Yazdipour (2011), on the other hand, also contributed towards reinforcing the significance of behavioural financial accounting in improvising the accounting functionalities by integrating the concepts of entrepreneurship business. In this regard, Curtis (2004) took consideration of the fact that small, medium and large-scale business processes require heavy investments for establishing or continuing with their respective business processes in long-term. Subsequently, it lays considerable amount of focus upon the behavioural financial accounting approach determining the potentiality of influencing the decision-making procedure of the investors (Yazdipour 2011; Curtis 2004). 2.3. Behavioural Managerial Accounting Notably, behavioural traits of managerial accounting generally comprise the techniques through which, the concerned users are made aware of accounting as well as non-accounting information and likewise, develop strategic decisions. In alignment to the above context, Riahi-Belkaoui (2002) specifically illustrated about the impartment of specific accounting and non-accounting information, which can bring about substantial changes within the behavioural aspects of the managers in an organisation who can be duly considered as potential users. In addition, Riahi-Belkaoui (2002) also portrayed about how such remedial changes within the behavioural patterns of the managers can lay intensive amount of impact upon their decision-making procedure based upon which, the success and the failure of an organization depends to a considerable extent (Riahi-Belkaoui, 2002). Likewise, Caplan (1992) has also focused towards creating a link between the emerging trends within management accounting and the way it affects the psychological and behavioural aspects of the entities associated with the controlling mechanisms of new generation accounting systems. Facts mentioned by Caplan (1992) also project about the inverse relationship prevailing between the strengthening of technological aspects associated with the accounting system and the behavioural stance of the users (Caplan 1992). Management accounting encompasses multiple counts of functional folds that lay considerable influences on the decision-making patterns of the involved individuals. Within such folds, technological implementation holds a vital applicability. Considering this notion, Moorthy et al. (2012) illustrated the necessity of technological implementation within the domain of management accounting for undertaking appropriate decisions. The facts mentioned by Moorthy et al. (2012) mainly portray the positive as well as the negative dimensions of IT implementation within the functional structure of decision-making procedure. Specific level of focus has also been laid upon how management accounting utilises IT for issuing all accounting and budget related decisions that subsequently supports the decision makers in devising appropriate solutions. Fowler (1999), on the contrary, illustrated the role played by management accounting in improvising the work quality and behavioural aspects associated with the employees. Considering these aspects, one can clearly understand the level of reliance projected by an organisation upon its structured budget. Moreover, a detailed idea can be gained about the influences caused by the aforesaid aspects on the perceptions and behavioural patterns of the internal users who are assigned with the role of accomplishing the determined organisational goals (Moorthy et al., 2012; Fowler, 1999). In general, management accounting deals with decision-making based upon strategized budget plans. Therefore, a necessary mandate exists that without the presence of specificity within the structured budget along with the managed utilisation of resources, it might become highly tedious for the professionals to develop appropriate functional plans. Taking this fact into consideration, Kidane (2012) has illustrated the necessity of transmitting economic and accounting related information in making appropriate business judgments. With similar emphasis, Emmanue et al. (2008) conducted a survey of the ‘senior mismanagement accountants’ concerning how they implement the strategically structured decisions. Management accounting also encompasses numerous other aspects related to psychology and work fashion of the managers. Contextually, Sunarni (2013) has established a suitable linkage prevailing between the psychological aspects of the managers and the structured budget plans, based on which, they will have to perform effective functions for attaining the perceived organisational targets (Sunarni, 2013; Kidane, 2012; Emmanue et al., 2008). It is worth mentioning that the notion of management accounting also comprises the potentiality of shifting the behavioural patterns of the managers towards sustainability, which is a mandate factor for preserving long-term sustainability. In this similar context, Collins et al. (2011) deciphered the relationship persisting between sustainability and management accounting. The facts projected by Collins et al. (2011) clearly illustrated the ways through which the managers of a business organisation can utilise the concept of management accounting for coming up with the best possible sustainability strategies. Schaltegger & Burritt (2009), in a concise manner, has also elaborated about varied behavioural aspects of management accounting and sustainability. As per Schaltegger & Burritt (2009), the planning teams should structure their respective functionalities in such a manner so that it lays positive impact upon the behavioural patterns of the internal users generating distinct positive outcomes (Collins et al., 2011; Schaltegger & Burritt, 2009). With regards to the above context, Zvezdov (2012) projected thoughts about the behavioural implications of internal users towards the society and culture as a result of standardising the conception of management accounting. Certain facts mentioned by Zvezdov (2012) also helped in recognising the relationship persisting between cost and management accounting. Likewise, Harris & Durden (2012) visualised management accounting as a theme for maintaining long-term sustainability in future. In alignment with the thoughts projected by Zvezdov (2012), Harris & Durden (2012) has considered certain aspects of cost accounting within the discussion. Contradictorily, Lambert & Sponem (2010) have specifically illustrated the possible problem solving dimensions that form a part of management accounting, ensuring long-term sustainability (Harris & Durden, 2012; Zvezdov, 2012; Lambert & Sponem, 2010). Moreover, the discussion also accounts regarding how such problem solving techniques help in making appropriate decisions related to organisational benefits. If observed from a logical perspective, it can be affirmed that the behavioural aspects associated with the approach of management accounting can be stretched far in greater boundaries rather than just remaining confined to the internal users. For instance, the behavioural aspects associated with management accounting can be utilised for structuring and operating certain structures that hold the ability to improvise the performances of the internal users. Otley (2001) has also drawn a similar inference, paying utmost attention on determining the fact about improvising flexibility associated with the behavioural aspect of management accounting. In a cause and effect relationship, Ward & Graves (2004) has further implemented the lean principle within the behavioural aspects of management accounting. Facts mentioned by Ward & Graves (2004) also illustrate the applicability of management accountants’ behavioural aspects within the different industry sectors for mitigating conflictive elements persisted within the internal users (Ward & Graves, 2004; Otley, 2001). 3. Conclusion From the above analysis, a clear understanding can be attained regarding the techniques through which, behavioural accounting can be utilised for performing the modern day accounting functions or practices in a much effective manner. Throughout the discussion, prime focus has been laid upon the impacts of behavioural accounting on the financial, taxation and managerial decision-making procedures implemented in today’s competitive global market. The discussion also encapsulated data that entails an in-depth understanding about influences of accounting information on the behavioural aspects of the managers and the investors while making effective strategies related to accounting and investment. Thus, with these concerns, the necessity of financial, taxation and managerial accounting within the financial functionality can be understood quite well. Moreover, the discussion also supports the provision of a detailed idea regarding how an appropriate control over the behavioural aspects of the managers and potential investors can bring down the market risk levels by a greater percentage, which in turn, generates varied positive outcomes. Facts regarding the integration of sustainability with the approach of managerial accounting also form credential aspects of this entire discussion. It is worth mentioning in this similar context that financial, taxation along with diverse managerial accounting approaches have the potentiality of improvising the overall market accounting scenario. Specially mentioning, precise data mentioned within the literature section also encompasses the concepts of portfolio accounting and entrepreneurial business process. Accurate level of predictions regarding the necessity of considering varied economic aspects within the decision-making procedures of the investors can be ascertained from the above discussion. More importantly, the above analysis in the form of reviewing varied literatures also deciphers the ways or the practices required to perform better financial accounting functions for ensuring transparency and comprehensibility altogether. The key findings thus obtained from the research findings helped inferring that the state of the art of behavioural accounting along with its components can certainly result in better financial accounting practises if implemented with efficiency. 4. References American Accounting Association. (2006). Behavioural tax research, Papers, 1-3. Bhatt, B. K., & Chauhan, A. A, (2014). Behavioural finance: a new paradigm of finance. International Journal of Application or Innovation in Engineering & Management (IJAIEM), 3(2), 359-362. Byrne, A., & Utkus, S. P. (2013). 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Journal of Applied Quality Management, 2(1), 41-57. Feldstein, M. (1983). Behavioural simulation methods in tax policy analysis. University of Chicago Press, 1-6. Gillenkirch, R. M., & Arnold, M. C. (n.d.). State of the art des behavioural accounting. Tax Policy Analysis, 1-13. Harris, J., & Durden, C. (2012). Management accounting research: an analysis of recent themes and directions for the future. James Cook University, 10(2), 21-42. Herschberg, M. (2012). Limits to arbitrage: an introduction to behavioural finance and a literature review. Palermo Business Review, 7-21. Jahanzeb, A., Muneer, S., & Rehman, S. U. (2012). Implication of behavioural finance in investment decision-making process. Information Management and Business Review, 4(10), 532-536. Kannadhasan, M. (n.d.). Role of behavioural finance in investment decisions. Introduction, 1-7. Kidane, F. (2012). Decision-making and the role of management accounting function a review of empirical literature. Journal of Radix International Educational and Research Consortium, 1(4), 1-30. Lambert, C., & Sponem, S. (2010). Roles, authority and involvement of the management accounting function: a multiple case-study perspective. Acknowledgements, 1-52. Levi, M., Li, K., & Zhang, F. (2012). Risk homeostasis and corporate acquisitions. The Journal of Behavioral Finance & Economics, 2(1), 21-49. Moorthy, M. K., Voon, O. O., Samsuri, C. A. S. B., Gopalan, M., & Yew, K. T. (2012). Application of information technology in management accounting decision-making. International Journal of Academic Research in Business and Social Sciences, 2(3), 1-16. Otley, D. (2001). Extending the boundaries of management accounting research: developing systems for performance management. British Accounting Review, 33, 244-261. Riahi-Belkaoui, A. (2002). Behavioural management accounting. Quorum Books, 1-274. Schaltegger, S., & Burritt, R. L. (2009). Sustainability accounting for companies: Catchphrase or decision support for business leaders? Journal of World Business, 45, 375–384. Sewell, M. (2010). Behavioural finance. Introduction, 1-13. Shiler, R. J. (2003). From efficient markets theory to behavioural finance. Journal of Economic Perspectives, 17(1), 83–104. Sunarni, C. W. (2013). Management accounting practices and the role of management accountant: evidence from manufacturing companies throughout Yogyakarta, Indonesia. Review of Integrative Business & Economic Research, 2(2), 616-626. Ward, Y., & Graves, A. (2004). A new cost management & accounting approach for lean enterprises. University of Bath School of Management, 1-43. Zvezdov, D. (2012). Corporate sustainability accounting: beyond unfreezing. Centre for Sustainability Management, 18(3), 181-198. Read More